An Analytical Framework for Welfare Analysis of Trade

The purpose of this note is to develop a general model of trade between countries in which benefits and costs of free trade and restrictions to trade can be analysed. The model assumes a linear relationship in all of its components and the existence of a general equilibrium in prices in the post-trade markets determined by the world market price. Though the following situations are not examined in the note, the derived framework can be used to examine changes in social welfare from trade restrictions in the two countries, such as from a tariff or a quantity restriction on exports and imports and reciprocity, as well as industry subsidies, favourable production laws, lowering of environmental standards, and favourable corporate taxation